Proposed cost-shifting in patent infringement cases

This is the final article in our series addressing patent reform proposals aimed at alleged patent system abuse by non-innovating, non-practicing patent monetization entities. In our first article, we counseled tweaking — not revamping — the U.S. patent system (the greatest system for innovation ever known) and examined proposed uniform procedural rules for patent cases. Our second article considered proposed “end user” protections. This final article reviews proposed cost-shifting in patent cases to discourage questionable lawsuits or discovery requests.

In U.S. litigation, each party generally bears its own costs and attorneys’ fees whether they win or lose (unlike in many international systems, such as the U.K., where the loser pays not only their own, but the other side’s attorneys’ fees and costs). This “American Rule” seeks to increase access to the courts by avoiding the chilling effect caused by the prospect of paying the other side’s fees and costs should a party not prevail on what they considered a meritorious claim or defense. Some have raised concerns that non-innovating, non-practicing patent monetization entities use the threat of patent litigation costs to extract nuisance settlements on meritless claims. The argument is that, unlike typical patent litigations between competitors, there is a significant disparity in litigation costs between non-practicing patent monetization entities (whose discovery obligation may involve producing a couple boxes of documents and witnesses) and large corporate defendants (who often face hundreds of thousands of dollars in discovery costs, many witnesses and business disruption).

The patent statute already provides for fee-shifting in certain “exceptional cases,” but some say that courts rarely do so. Thus, some in industry and in all three government branches seek to increase cost-shifting in patent cases.

Congress is considering several cost-shifting bills. The Saving High-Tech Innovators From Egregious Legal Disputes (SHIELD) Act, introduced in 2012 and modified in February 2013, would force certain types of non-practicing entity plaintiffs to pay the costs and attorneys’ fees of a defendant who prevails on issues of infringement or invalidity. The SHIELD Act also requires certain patent assertion entities — those that are not the inventor, original patent assignee or a university or associated technology transfer organization — to post a bond at the outset of the case to allay concerns that cost-shifting would not deter meritless suits by insolvent entities.

In May 2013, Sen. John Cornyn (R-TX) introduced the Patent Abuse Reduction Act of 2013 that has both general fee-shifting as well as shifting of certain discovery costs. This bill would award costs and fees to the prevailing party in patent cases unless the loser’s positions and conduct were “objectively reasonable and substantially justified.” The bill also limits discovery to certain “core documentary evidence” on which each party bears its own cost of production (such as discovery relating to the patents asserted and accused product functionality), but allows courts to grant a party additional discovery as long as that party pays for the other parties’ costs in producing it.

The Patent Discussion Draft recently introduced by Rep. Bob Goodlatte (R-VA) contains similar provisions on so-called “loser-pays” fee-shifting. This draft also requires the Judicial Conference of the United States to consider and develop rules and procedures to address disparate discovery burdens in patent cases.

Congress is not the only government branch weighing in. In June, the Obama administration issued “Legislative Recommendations” for patent cases that include giving district courts more discretion to award fees as a sanction for “abusive court filings.” That same day, Chief Judge Randall Rader of the United States Court of Appeals for the Federal Circuit co-authored an op-ed in the New York Times titled “Make Patent Trolls Pay In Court.” That op-ed argued that judges already have the authority (under Section 285 of the Patent Act and Rule 11) to shift fees in order to “discourage aggressive suits and frivolous demands.”

Not all fee-shifting calls have come from defendants. Some non-practicing entities, such as IPNav and Intellectual Ventures, favor more fee-shifting in patent cases if applied equally to plaintiffs and defendants.

Not everyone agrees with fee-shifting. For example, Judge Kathleen O’Malley of the Federal Circuit (previously a district court judge) raises concerns that the fervor to legislatively address perceived patent litigation abuse will improperly invade the role of the judiciary and erode the protections afforded by a balanced three-branch government.

It remains to be seen whether cost-shifting will be part of any “patent reform” legislation or if courts will apply existing cost-shifting measures more vigorously. Patent litigants should pay close attention to the debate.

Contributing Author

David Long

David Long is a patent litigation Partner in the Washington, DC office of Kelley Drye & Warren LLP, with over twenty-five years’ experience in telecommunications.